Implementation of stricter regulations for cryptocurrency exchanges in Japan
Japan is working on significant modifications to cryptocurrency laws following renewed focus on Mt. Gox-related repayments in 2024.
The Financial Services Agency (FSA) intends to enforce new regulations mandating that cryptocurrency exchanges maintain specific “liability reserves” to safeguard customers against losses due to hacks or unauthorized transfers. These initiatives aim to align the cryptocurrency sector with the stringent standards that traditional financial institutions adhere to in Japan, one of the globe’s most tightly controlled markets.
Starting Dec. 9, 2025, under the Payment Services Act, registered cryptocurrency exchanges in Japan will be obligated to adhere to strict conditions. These stipulations encompass asset custody, accounting, separation of client funds, Anti-Money-Laundering (AML) measures, and cold storage policies. However, exchanges still lack a legal requirement to maintain dedicated funds for customer compensation post-hack or unauthorized outflow. The FSA and its advisory Financial System Council have determined that this protective gap must be addressed.
Japan has encountered notable failures and consumer losses within the crypto sector. The 2014 hack of Mt. Gox, where over 740,000 Bitcoin (BTC) was taken, led to the exchange’s bankruptcy and an ongoing repayment process. In May 2024, DMM Bitcoin, a Japanese exchange, lost 4,502.9 BTC due to a significant theft. These events highlighted customer vulnerability even with robust measures like mandatory cold wallet storage.
Requirements of the proposed liability reserve rules
The new regulations will necessitate exchanges to maintain dedicated funds to compensate customers in case of security breaches.
A legal obligation to establish liability reserves
As per a report from The Nikkei, the proposed legislation will mandate all registered cryptocurrency exchanges to hold liability reserves. These reserves will be utilized to reimburse customers for lost assets due to unauthorized transfers. This requirement will extend even to assets stored in cold wallets, eliminating the previous notion that offline storage was adequate protection.
Aligning reserves with Japan’s securities industry standards
The FSA intends to base the amount of these reserves on the existing standards utilized for securities firms in Japan. Traditional securities companies are required to maintain reserves between 2 billion and 40 billion Japanese yen, depending on their size, risk profile, and operational activities.
Insurance as a potential alternative
To alleviate the burden on smaller firms, the FSA is considering allowing exchanges to fulfill some or all reserve requirements through approved insurance policies rather than solely maintaining cash or liquid assets. Discussions are still ongoing regarding acceptable policy types, minimum coverage levels, and approved insurers.
Liability reserves as part of a broader regulatory reform
The liability reserve rule represents just one aspect of a comprehensive set of reforms. Other proposed changes include:
Mandating third-party wallet providers, custodians, and trading system operators to register with regulatory authorities.
Reclassifying certain cryptocurrencies under the Financial Instruments and Exchange Act, which would enforce stricter securities-style regulations, including audits and disclosure requirements.
Enhancing insolvency procedures so that customers can receive compensation more swiftly, possibly from liability reserves or insurance.
Did you know? South Korea’s 2021 regulations mandated exchanges to collaborate with licensed banks, implement real-name accounts, and adhere to stringent AML checks. This dramatically reduced the number of active exchanges from hundreds to fewer than 20 in mere months.
Reasons regulators are pursuing this framework
The main objectives are enhanced customer protection, increased market confidence, and the rectification of remaining regulatory weaknesses:
Enhancing customer protection: Hacking incidents and subsequent delays in repayment have underscored the need for expedited compensation mechanisms. Liability reserves will guarantee that exchanges have readily available funds, preventing customers from having to endure protracted bankruptcy processes.
Restoring and sustaining market trust: Japan is striving to align cryptocurrency regulations more closely with those governing the securities industry. Through this policy, the nation aims to present itself as a secure environment for digital assets, thereby mitigating the reputational risks posed by past high-profile hacking incidents.
Addressing regulatory gaps: Cold wallet mandates decrease the likelihood of attacks but do not eliminate it entirely. The new reserves offer an additional Layer of protection that emphasizes financial recovery post-incident rather than pure prevention.
Did you know? The European Union’s Markets in Crypto-Assets (MiCA) regulation standardizes rules across 27 nations, encompassing licensing, reserve backing, market abuse, and consumer protection. This creates the world’s first continent-wide rulebook for crypto exchanges.
Effects on exchanges and investors
The impending changes will affect exchanges, customers, and the broader market in various ways:
Consequences for exchanges
Increased operating expenses due to the necessity of holding significant reserves or purchasing insurance
Challenges for smaller exchanges in meeting requirements, potentially leading to industry consolidation
Added accounting, reporting, and compliance obligations.
Consequences for customers
Enhanced protection against losses stemming from exchange failures
Quicker compensation in the case of hacks due to the dedicated financial safety net
Overall reduction in risks associated with using centralized platforms.
Consequences for the broader market
Japan’s strategy could influence regulatory advancements in other nations. Around the world, exchanges may adopt more professional practices for custody and risk management.
Did you know? US crypto exchanges grapple with a fragmented set of state-level regulations, including the New York BitLicense, money transmitter laws, and federal oversight for specific assets. This complexity makes compliance one of the most intricate challenges globally.
Outstanding questions
Several significant aspects of the proposed regulations are still being finalized, awaiting the upcoming Financial System Council report and the 2026 legislation.
The unresolved questions include:
The exact methodology for determining each exchange’s reserve amounts
The degree to which insurance may substitute for cash reserves
Timelines for implementation and grace periods for existing exchanges
The interaction of reserves with updated insolvency procedures
Whether the requirement will encompass cases of mismanagement, in addition to hacks
The specific oversight and enforcement measures.
